GBP/USD opened the week with a 170 pips gap. Will the sterling slide further this week?
Over the weekend, reports saying UK Prime Minister Theresa May will announce intention of a clean and hard Brexit early this week. GBP/USD is on the brink of hitting 1.20 and closing in on 32-year low. The price action is telling us a hard Brexit is not fully priced in yet. The source of report was not revealed; neither were there any comments from the prime minister’s office. May is scheduled to speak on Tuesday and we think there are 2 possible outcomes.
1. May announces plans leading to a hard Brexit. Sterling is likely to fall further.
2. May announces plans leading to a soft Brexit. A relief rally is likely.
CPI, employment data and retail sales will be released, but the focus will be on May’s speech.
The dollar bull retreated after a disappointing press conference by Trump. USD/JPY fell below 114 the lowest in more than a month. Will Trump disappoint again during his inauguration speech this week? Hope has been building up since his victory last November. Promise of tax cut and fiscal spending has pushed both the dollar and stocks up. We believe Trump is well aware how important it is to uphold his promise and keeping the fire of hope burning, especially on his first day as US president. The other pillar supporting a strong dollar is Fed’s tightening plan, which in turn, is supported by healthy jobs growth, rising spending and inflation. 3 rate hikes remain on the table. Dollar is expected to find support and possibly stage a recovery, unless Trump fails to live up to expectations.
European Central Bank (ECB) is expected to maintain their monetary policy. ECB announced an extension of their stimulus until end of this year in their last meeting. Some investors may be looking out for some hints of tightening since recent Eurozone data have shown improvements. We remain sceptical towards ECB considering tightening at this moment. There are too many uncertainties lying ahead, ready to pounce on the fragile recovery. We expect ECB continue to dispel any rumours or expectations of tightening considerations in their press conference following their interest rate announcement.
Bank of Canada is expected to remain neutral in their policy. Crude Oil prices have stabilised, WTI is consolidating between $51 and $55. USD/CAD has fallen from 1.36 to 1.31 since end of last year. A strengthening loonie is presenting a challenge to inflation, but it should ease the pressure once dollar finds its strength again. We do not expect the central bank to express too much concern regarding renegotiation of the North American Free Trade Agreement (NAFTA). US and Canada are likely to maintain their current relationship, especially when US imports a lot of oil from Canada.
Our Picks
USD/JPY – Possible Long. The level 114 is expected to hold, unless President-elect Trump fails to live up to expectation in his inauguration speech.
EUR/JPY – Possible Long. Price is near support of 121. ECB is expected to remain neutral and Trump is likely to re-ignite risk-appetite again.
D30/EUR (DAX) – Possible Long. We identified the key support of 11530. ECB stimulus will last until end of this year. Possible to look for buying opportunity around the support.
Top News This Week (GMT+8 time zone)
US: Core CPI m/m. Wednesday 18th January, 9.30pm. We expect figures to come in at 0.3% (previous figure was 0.2%).
Canada: Overnight Rate. Wednesday 18th January, 11pm.
We expect figures to remain unchanged at 0.5% (previous figure was 0.5%).
Europe: Minimum Bid Rate. Thursday 19th January, 8.45pm.
We expect figures to remain unchanged at 0.0% (previous figure was 0.0%).
Fullerton Markets Research Team
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